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MEC-205: Indian Economic Policy

MEC-205: Indian Economic Policy

IGNOU Solved Assignment Solution for 2021-22

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Assignment Code: MEC-205/AST/2021-22

Course Code: MEC-205

Assignment Name: Indian Economic Policy

Year: 2021-2022 (July 2021 and January 2022)

Verification Status: Verified by Professor


Note: Answer all the questions. While questions in Section A carry 20 marks each (to be answered in about 700 words each) those in Section B carry 12 marks each (to be answered in about 500 words each).

 

 

Section-A

 

 

1. “The pattern of structural change in the Indian economy has deviated from the development pattern of Western and South Asian economies” Examine.

Further, in the light of this statement evaluate major policy initiatives (relating to economic reforms) taken by the Government of India since 2014-15.

Ans) The development process necessitates structural change. An economy's structural change occurs primarily along two dimensions: the first is the changing share of GDP by sector, and the second is the changing share of the labour force involved in each sector. Changes in the share of the organised and unorganised sectors, as well as the rural and urban sectors in output and employment, as well as the share of consumption, government spending, investment, and net exports in India's GDP, are all examples of structural change. The proportion of public and private sectors in the Indian economy may also reflect structural change.


Major Policy Initiatives in the Recent Decades

Containing Inflation and Soaring Fiscal Deficits

In February 2015, a Monetary Policy Committee (MPC) was formed following an agreement between the Government of India (GOI) and the Reserve Bank of India (RBI), with the mission to target headline inflation of 4% with a two-percentage-point band on each side. Inflation has been kept under control thanks to the framework. Except for one month since the MPC was originally established in April 2015, monthly headline inflation has always remained within the band.


The Gross Fiscal Deficit was also subjected to discipline (GFD). The Fiscal Responsibility and Budget Management (FRBM) Act of 2003, which has been reintroduced since 2016, establishes the glide path for the GFD-to-GDP ratio to reach a final target of 3%. From 4.5 percent in 2013-14 to 3.4 percent in 2018-19, the ratio has decreased. Other macro-stability indicators have improved in the same way.


Beneficiary Focus and Targeted Delivery

The administration concentrated on last-mile delivery of essential services to the poor, basic safety-nets, and providing paths for the benefits of growth to reach the bottom of the socioeconomic ladder, in addition to re-establishing macroeconomic stability. One such measure that paved the ground for this trickle-down was the passage of the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits, and Services) Act, 2016. The government may now give targeted assistance by providing each person a unique identification number. Aadhaar coverage currently stands at more than 90% of the country's population.


The Pradhan Mantri Jan Dhan Yojana (PMJDY), a financial inclusion initiative, provides another means for money to trickle down. The creation of a JAM (Jan Dhan, Aadhaar, Mobile) trinity by linking mobile numbers with bank account numbers and then Aadhaar further secured Direct Benefit Transfers (DBT) to the targeted beneficiaries.


MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme), NSAP (National Social Assistance Programme), PMAY-G (Pradhan Mantri Awas Yojna-Gramin), as well as other scholarships and fertiliser subsidy schemes, are some of the major schemes executed by DBT. The Pradhan Mantri Ujjwala Yojana (PMUY), which was established in 2016 to provide LPG connections to BPL (Below Poverty Line) families, was a crucial programme for last-mile distribution. Another initiative to create a basic safety net was started in 2018 with the Ayushman Bharat Yojana (ABY), which gives a cashless treatment insurance cover of Rs. 5,00,000 to each of the 100 million BPL families for a monthly fee of Rs. 100.


Infrastructure

During the years 2014-19, the construction of physical infrastructure accelerated rapidly. Electricity was ultimately brought to every hamlet in India in April 2018, with the endeavour to electrify every home still ongoing. National highways (NH) are being built at a quick pace, with more than 20% of the existing 132,000 km of roadway being created in the last four years alone. The UDAAN scheme was started in 2017 with the goal of improving regional connectivity by extending flight service to Tier 3 and Tier 4 cities across the country. The North-Eastern states' infrastructure was given special attention, and there has been a considerable improvement in connectivity thanks to the construction of vital bridges and the extension of railways and highways.


Federalism

Fiscal federalism strengthened significantly when the Fourteenth Finance Commission increased the share of states in the divisible pool of central taxes from 32 per cent to 42 per cent. Although central grants to states saw compensatory cuts, the shift empowers states to manage their revenues and expenditures independently. The launch of the GST in July, 2017 added a new dimension to centre-state and inter-state financial relations. The GST Council experience provides key learning for implementing cooperative federalism in several other areas such as labour and land regulation. Niti Aayog has helped institutionalise cooperative federalism by setting up teams from both the states and the central government to jointly evolve strategies for addressing development challenges. States have also been involved in a friendly competition to improve their Key Performance Indicators (KPIs).


Corporate Exits

When the Insolvency and Bankruptcy Code (IBC) was introduced in 2016, it consolidated the insolvency resolution process into a single law by repealing/ amending multiple rules and processes earlier in operation. IBC set a time limit for closing of insolvency and bankruptcy cases within which assets of a defaulting borrower are auctioned to pay off the debt owed to lending institutions. Following the operationalisation of IBC since 2017, a significant number of non-performing assets have been brought under its ambit. In addition to the large sums recovered by creditors from resolution or liquidation, the introduction of a framework for exit has improved the overall business culture of the country.


Demonetisation

The government of India took a bold step to demonetise Rs. 500 and Rs. 1000 currency with effect from 8 November 2016 midnight. It was a major decision which had its impact on all sections of the society. It was aimed to reduce funds to terrorism, decrease the corruption rate, eliminate counterfeit notes, and open gates for a cashless economy. Through the demonetisation exercise, the government has been pressing hard to become a cashless economy and is encouraging more and more people to adopt the digital payments system for their transactions.


Goods and Services Tax (GST)

Implemented on July 1, 2017, the Goods and Services Tax (GST)is regarded as the biggest and substantial indirect tax reform since independence. GST has replaced a number of Central and State taxes, made India more of a national integrated market, and brought more producers into the tax net. It has subsumed all sorts of indirect taxes like Central Excise Tax, VAT/Sales Tax, Service tax, etc. and implement one taxation system in India. The main aim of GST is to create a single, unified market which will benefit in the development of country’s economy. GST taxes only the final consumer. Hence the cascading of taxes (taxon- tax) is avoided and production costs are cut down. The system is expected to improvise tax collections and boost up India’s economic development and break all tax barriers between Central and State Governments.

 

2. What do you mean by inequality? How the inequalities of income are measured in an economy? Examine the policy implications of wide spread poverty and inequality in the Indian economy.

Ans) Inequality, or the state of not being equal, particularly in terms of status, rights, and opportunities, is a central idea in social justice theories. It is, however, prone to misunderstanding in public discourse because it might imply different things to different people. However, some distinctions are universal. Many authors define "economic inequality" as "income inequality," "monetary inequality," or, more broadly, "living conditions inequality." Others contrast a rights-based, legalistic approach to inequality—inequality of rights and associated obligations—from a rights-based, legalistic approach to inequality (e.g. when people are not equal before the law, or when people have unequal political power).


Much of the debate around economic inequality has broken down to two points of view. One is primarily concerned with disparities in material well-being results, which can be caused by factors outside one's control (ethnicity, familial history, gender, and so on), as well as ability and effort. This point of view is ex-post, or achievement-oriented. The second viewpoint is focused with unequal opportunities, or focusing solely on events beyond one's control that influence one's prospective results. This is a high-level or possible achievement viewpoint.


The classic perspective holds that inequality is a natural part of the economic process. Certain industries gain more from the structural restructuring of the growth process than others that lag behind. As a result, in the beginning, growth leads to an increase in inequality. The advantages of growth, on the other hand, trickle down to the trailing sectors, resulting in a more fair growth outcome. The 'Kuznet curve,' which shows how inequality rises and subsequently falls, illustrates this process. In India, however, this process did not hold true, since an increase in growth rate did not result in a reduction in inequality.


Since the early 1990s economic reforms, the country has expanded rapidly, with growth rates averaging approximately 7% in 1993-94 and 2009-10, and 6.7 percent from 2010 to 2016.


In India, inequality is not only extraordinarily high compared to other countries at similar levels of development, but it has also been rising over time, notably since the early 1990s. While the rate of increase in inequality appears to have decreased since 2004-05, it is still on the rise. Disparity in India is as much about rising income inequality as it is about education, health, nutrition, sanitation, and opportunities. Rapid GDP growth, a liberal and expansionary fiscal policy, a huge public debt, rapid technological advancements and changes in production requiring more capital, an increasing share of services in GDP, unfavourable policies and institutions, and so on could all be possible factors. Aside from that, there are significant horizontal inequalities in the country based on caste, class, religion, race, gender, and location. The Gini index, which ranges from zero (perfect equality) to one (inequality), is a widely used metric of inequality (perfect inequality). According to this metric, inequality decreased between 1983 and 1993–94, but increased significantly after the start of reforms in 1991.


Given the rising differences in income inequality, opportunity inequality (including access to education, health, and financial services/inclusion), unemployment, poverty, and other forms of social suffering, policies aimed at inclusive growth are essential. Access to universal education and health care, as well as financial services, new technology, gender equality, and more equitable resource distribution, can all contribute to inclusive economic development. In India, inclusive growth has been substantially represented in several plan periods. According to the 11th Plan, inclusive growth is "a growth approach that produces broad-based benefits and assures equitable opportunity for all." Similarly, the 12th five-year plan's primary goal was "Faster, More Inclusive, and Sustainable Growth." Progress has been made in areas such as agricultural growth, poverty reduction, education, health, and the upliftment of SCs and STs, among others. However, progress on inclusion has been slower than anticipated. It can be viewed from a variety of perspectives. Many indicators of the Millennium Development Goals were not met by India (MDG). In terms of literacy, the goal of boosting literacy among backward classes and other underserved groups has not been met.


Agriculture's expansion is still in perilous territory. MGNREGS and other employment initiatives are inadequate. Many plans, programmes, and schemes exist, but their implementation falls short of expectations.

 


Section B

 

 

3. “The demographic dividend is one time opportunity and is expected to last for 25 years”- In the light of this statement explain the challenges on the way of reaping demographic dividend.

Ans) The demographic window of opportunity has several challenges.


1) Education and Skills

Human resource development is critical to realising the demographic dividend. Education investment helps to expand the productive labour force by providing them with more information and skills. In comparison to the target of 6%, public spending on education has been quite low (about 3.6%). If we strive for universalization of basic education, universal resource provision, universal enrolment and retention, and growth in secondary and higher education, the existing contribution is substantially lower. Education has the potential to be a significant tool for social change and economic development. Education quality must be addressed promptly, which is doable if we boost education spending and utilise resources wisely.


Education equips young people with the skills and perspectives they need to contribute meaningfully in today's information economy. In today's world, India aspires to be the world's skill capital. We must improve the quality of India's primary, secondary, and university education in order to achieve this. Quality education improves students' knowledge, skills, and productivity, allowing them to work productively in various areas of the economy later on. As a result, education is critical to young India's ability to capitalise on the demographic dividend. In addition, girls' education can be used to encourage fertility reduction. Because education increases the opportunity cost of having children, working and educated women prefer to have fewer children. As parents invest more in their children's health and education, the cost of investment per child rises, increasing the productive capacity of future generations.


2) Employment

The benefits of a demographic bonus with a lower dependency ratio can only be realised if the country's working-age population to total population ratio increases in the face of increased job opportunities. The demographic dividend's advantages are neither inevitable nor assured. India's economic growth has not been particularly favourable to job creation. As the amount of unorganised and informal work in overall employment has increased, the quality of available jobs has deteriorated. The informal sector employs over 93 percent of the workforce. The high degree of informality in India is a hindrance to the country's economic progress and a source of economic disparity. Informal workers are exposed to shocks such as loss of income and illness since they have no job security. In comparison to formal workers, they earn less, labour in an unsafe environment, and are hence less productive.


3) Environmental Issues

Future population expansion will have a significant impact on the country's demand for water, food, forest products, non-renewable resources, and other resources. The goal is to ensure that development is sustainable, meaning that current requirements are addressed while future generations' resources are safeguarded. The fast urbanisation and expansion of industrial output had a significant impact on the quality of the environment. As a result, it is critical to guarantee that the demographic dividend does not come at the expense of the environment.


4) Program for Family Planning

Acceleration of fertility drop is part of India's demographic window of opportunity. Expanding family planning services and meeting India's unmet contraceptive needs would assist India in lowering its overall fertility rate below the replacement level. Second, childhood disease immunisation would increase the chances of baby and child survival while lowering the fertility rate. Expanding coverage of well-known and low-cost vaccines like those against polio, tetanus, and measles, as well as include more expensive vaccines like those against rotavirus, pneumococcal disease, and Haemophilus influenza type b (Hib), will address India's major causes of infant death.


The provision of high-quality family planning and reproductive health care services will undoubtedly assist the most vulnerable members of society, particularly women. The higher rate of fertility fall will also result in a decrease in the number of young people joining the labour force, improving employment chances and raising people's standard of living. Parents can invest in their children's health and education, which will aid in the development of a skilled and productive workforce for our country. Family planning is also helpful in lessening the strain on natural resources.


5) Good Administration

When a country's institutions are well-functioning, there is transparency in the legal system, a low amount of corruption, respect for property rights, and the sanctity of contracts, progress moves quickly. A good governance model is essential for the country's balanced growth, equity, and stability. It aids in the proper channelling of resources so that youth are productively absorbed in the agriculture, manufacturing, and service sectors. In order to minimise large trade imbalances and lower inflation, policies that promote inclusive economic growth should be advocated. Prudent fiscal and monetary policies are part of the governance model, as are well-developed and competitive financial markets. Workers' rights can be preserved and secured in labour markets if labour reforms are implemented.

 

4. What do you mean by the term ‘disinvestment’? Why should ownership of a public sector undertaking be diversified?

Ans) Disinvestment may or may not be an outcome of privatisation. When it comes to defining the term, privatisation involves transforming the ownership of a public sector business to the private sector known as a “strategic buyer”. In privatisation, full ownership is transferred to the strategic partner. In a broader sense, privatisation refers to transfer of any government function to the private sector including governmental functions like revenue collection and law enforcement.


In disinvestment, the same transformation process happens while retaining 26 per cent or in some cases 51 per cent of share right (i.e. the voting power) with the public sector organisation. Here, the ownership is not transferred to strategic buyer. Divestment is said as the opposite of Investment. Investment means acquisition of certain assets; divestment means the release of assets. A business may be that a particular arm of it is not compatible with its core business and hence may decide to shelve or divest this business. Divestment may be done for various economic or social reasons.


The industrial policy of July 1991 is considered as a precursor of economic reforms which brought a change in the approach towards Public Sector Undertakings (PSUs). In the affairs of the public sector, it has been a game of politics throughout, and still is, despite the talk of structural adjustments and economic reforms. Some of the important factors leading to the need for privatisation are as under:

  1.  PSUs in India have no autonomy. As a result, a culture has developed that their major clientele are not the customers who pay for their services, but the ministers and officials of their controlling ministries.

  2. PSUs have many objectives imposed on them, some of which affect their efficiency and profitability. In fact, PSUs suffer from multiple principals and multiple objectives. As a rule, interventions through PSUs are both inefficient and costly. India needs privatisation to improve efficiency and to liquidate recurring liabilities for the government.

  3. Ownership should not matter to performance. That it does in India is a reflection on the poor understanding of business by the bureaucracy. It also indicates their lack of accountability. Poor performance only impacts on government budgets, not on individual officials.

  4. It is important to note that there are limitations being government as owner. Rao (1998) has emphasised that “the enterprise comes under a Ministry of Government and is subject to scrutiny by Parliament. The Government of the party in power exercises ownership through the Minister while the permanent civil service translates the will of the Government through the management of the enterprises. But the Minister and civil servant are temporary occupants of the owner’s chairs because of frequent changes in their portfolios. There are controls exercised on the enterprise at all levels.”

  5. “Public sector managers, who perform better in the liberated circumstances of private sector enterprises, have been known to complain that they are crippled by various regulations in a public sector entity. Unless a radical transformation is made to liberate the public sector manager from multiple scrutiny by organs of investigation and vigilance, a level playing field cannot be established between the public sector and the private sector”.


Privatisation does not lead to efficiency. Decontrol is probably a more important principle than privatisation; and many of the supposed positive attributes of privatisation can be imparted to public enterprises. In India, wholesale transfer of assets to private sector both on grounds of efficiency and equity is not easily acceptable. On the other hand, organisational efficiency requires a different approach. The framework of principal-agent relationship in private ownership has an advantage over public ownership. In the sense that both the principal and the agent have stakes in the efficient functioning of the enterprise and there is unanimity on the objective function to be maximised.

 

5. How the monetary policy has evolved in India? Give a brief account of the current monetary policy framework in India.

Ans) Evolution of Monetary Policy in India

Since the RBI's founding as the country's central bank in 1935, the approach to monetary policy has evolved throughout time to meet the needs of a dynamic economy. The broad governing concepts of monetary policy have been overall price stability and growth. The Reserve Bank of India (RBI) was nationalised in 1949, and the Banking Regulation Act was passed the following year. The latter requires banks to maintain a Statutory Liquidity Ratio (SLR) in the form of cash, gold, or approved securities as a proportion of their net time and demand liabilities. The RBI's function in the early decades after the country's independence was to support the government's development efforts by assuring an adequate supply of credit to the economy's priority sectors. There was sustained deficit financing throughout this period due to the emphasis of public investment in development policies. The main techniques of financing Government deficits were the issuance of ad hoc treasury bills by the government, which resulted in automatic monetisation of deficits, as well as securing the flow of funds from banks through greater SLR. Inflation was high in the 1970s due to the monetisation of deficits, the war with Pakistan in 1971, oil price shocks in 1973 and 1979, and droughts in 1973 and 1979. The rate of inflation grew from 10% in 1972-73 to 25% in 1974-75.


Price stability should take precedence in monetary policy, according to the Sukhamoy Chakravarty Committee, which was established in 1982 to review the functioning of the monetary system. A monetary targeting approach was recommended by the Chakravarty Committee. The RBI used a monetary targeting approach for monetary policy between the 1980s and the late 1990s. The core goals of monetary policy have remained development and price stability. The intermediate aim of monetary policy in this paradigm was wide money (M3).


As you may be aware, the Indian economy underwent numerous broad-based and dramatic reforms during the 1990s. Indirect instruments such as interest rates had begun to gain effectiveness as transmitters of policy signals as a result of developments and reforms in the financial sector. Money demand became unsteady as financial markets liberalised. Furthermore, the increased integration of the Indian economy with the world economy, as well as the resulting inflow of foreign capital, rendered comprehensive control of the money supply problematic. RBI switched to a "Multiple Indicators" approach in 1998-99 for these reasons. Monetary policy was created using a wide range of variables in this method, with a greater emphasis on the rates channel for monetary policy.


In September 2013, the RBI formed an expert committee led by its then-Deputy Governor, Dr. Urjit Patel, with the goal of improving the monetary policy framework by making it more open and predictable, among other things. It was suggested that inflation be made the nominal anchor for the monetary policy framework and that it be made the primary goal of monetary policy. A nominal anchor is a variable used by policymakers to "tie down" the price level or its trajectory.


Inflation expectations have a significant impact on price behaviour. As a result, the ideal nominal anchor must be capable of tracking inflation expectations. The Committee proposed that the inflation metric for monetary policy be CPI-Combined headline inflation. According to the committee, inflation expectations in the post-2011 period followed CPI inflation and were influenced by both fuel and food prices. As a result, the optimal monetary policy aim was CPI headline inflation.

 

6. ‘Crop diversification is the key for raising the farmer’s income’? Comment. Also critically examine the strategy envisaged by the Government for promoting crop diversification in India.

Ans) Past strategy for development of the agriculture sector in India focused primarily on raising agricultural output and improving food security. This strategy involved: (a) an increase in productivity through better technology and varieties, and increased use of quality seed, fertilizer, irrigation and agro-chemicals, (b) incentive structure in the form of remunerative prices for some crops and subsidies on farm product, (c) public investments in and for agriculture, and developing facilitating institutions. This strategy paid dividends as the country was able to address severe food shortage that emerged during 1960s:

  1. During the period 1965-2015, since the adoption of green revolution, India’s food production multiplied 3.7 times while the population multiplied by 2.55 times.

  2. The net result has been a 45 per cent increase in per person food production, which has made India not only self-sufficient in food grains at aggregate level but also a net food exporting country.

 

This strategy did not recognise the need to raise farmers’ income and thus no direct action for farmers’ welfare. NSSO data on Household Consumption Survey, 2011-12 reveal that more than 1/5th of rural households with self-employment in agriculture have income below the rural poverty line. During 1980s, farm income per cultivator was just 34 per cent of the income of non-agricultural worker, which further worsened to 25 per cent in 1993-94. Low level of absolute income of farmers and rising disparity between the farmers’ income and non-farm workers resulted in widespread emergence of farmers’ distress during 1990s. Low and highly fluctuating farm income has been detrimental to farmers and farm investment, and thus forcing young people leaving agriculture. Realising the need to pay special attention to the plight of farmers, the goal to double the farmer’s income by 2022-23 has been set by the government.


Policy Initiatives for Crop Diversification and Enhancing Value Realisation

To enhance the farmers’ income one of the alternatives is that farmers may be motivated to diversify the cropping pattern from cultivation of cereals such as wheat and rice to high value crops such as fruits and vegetables, commercial crops, spices etc. The idea behind Operation Green is to double the income of farmers by end of 2022 through changing the cropping pattern.


Basic Principles of Operation Green Strategy

Principle I: To establish the link between farmers and major organised retailers to begin with and thereafter allow them to access the retail markets. The real challenge is to find the right markets that can give them remunerative prices on a sustainable basis. Farmers can be organised in Farmers Producers Organisations (FPOs). NABARD and Small Farmers’ Agri-Business Consortium (SFAC) together have about 3,000 FPOs, which could be the starting points for the aggregation of commodities, assaying, sorting, grading, and even packing with bar codes, reflecting their traceability. It is targeted to form at least 10,000 FPOs by 2022.


Principle 2: The existing Agricultural Produce Market Committee (APMC) system of marketing does not allow FPOs to sell their produce directly to the private traders. APMC Act needs to be replaced by the New Agriculture Produce and Livestock Marketing, (Promotion and Facilitation) (APLM) Act, 2017.


Principle 3: Reducing post-harvest losses (PHL) in fruits and vegetables, which are approx. 40 per cent in India. Agri-logistics can help generate post-harvest specialised infrastructure needed for complete integration of cold-chain facilities. In order to increase the income gains to farmers, they should be involved in post-harvest logistics as partners through the Farmer Producer Organisation (FPO)/Village Producer Organisation (VPO)/ cooperative society. This would directly benefit the farmers by providing them access to bigger markets (beyond the local market) and more remunerative prices.


Principle 4: Linking the processing industry with farmers and FPOs. The processing of perishable agricultural products is low (around 2 per cent). In fact, farmers do not have access to the food processing markets and most of their produce they sell directly to APMC markets and private traders and thus get less than 1/14th of the price consumer pays to the chain of middlemen operating between farmers and retail and food processors. The operation green focuses on direct access of food processing market by FPOs. To facilitate this linkage, Agricultural Produce and Livestock Contract Farming and Services (Promotion & Facilitation) Act, 2018 has been drafted and circulated to all states for replacing it with existing APMC Acts.


Agricultural markets despite some changes continue to face many challenges like licensing barriers, lack of integration of various markets, lack of marketing infrastructure, high incidence of marketing charges, high wastages in supply chain, etc. Market dynamics continued with the protectionist perspectives. The best protection to farmers is in promoting long– term market linkages, such that markets are connected across place, time and form with farms. The necessary condition for transferring remunerative prices to the farmers is a competitive environment that facilitates fair and transparent price discovery.


E-National Agriculture Market (e-NAM)

The government introduced a Central Sector Scheme for promotion of a NAM to bring about a transformation in agriculture marketing environment. A unified market can be best realised through a pan-India electronic platform which can facilitate the participation of buyers and sellers from all over the country. The e- NAM network was inaugurated on 14-April-2016. As of July 2019, all 585 markets have been integrated into the scheme and 42.18 lakh farmers and 89,199 traders have been registered on e-NAM portal with a turnover of Rs. 16, 163.1 crore from the trading of 63.17 lakh tons produce. The government intends to link 22,000 mandis across the country with e-NAM, by 2021-22. The vision of a full-fledged e-NAM is where all types of markets have inter-operability in communication, standards, systems, operating under a common regulatory framework.

 

7. Discuss the issues and challenges faced by MSME Sector in India. Which policy initiatives have been taken by the Government to provide an enabling environment to the MSME sector?

Ans) In general, the sector is inflicted by some of the major challenges including:


i) Lack of Adequate Capital and Credit

This is one of the greatest challenges which constrains the growth of MSMEs in our country. Easy and timely access to credit is crucial factor for development and growth of enterprises. The Report of the Working Group on Rehabilitation of sick MSMEs by the RBI has identified this situation as a crucial reason for industrial sickness of this sector. This is further worsened by the complex collaterals instead by the banks, cumbersome sanction procedures and delay in disbursement and high rate of interest on term loans.


ii) Poor and Inadequate Infrastructural Facilities

Lack of adequate infrastructure facilities and poor support facilities marked by inadequate access to basic facilities like water, power supply, road/rail connectivity, etc. adversely affect this sector and contribute to enhance their operational costs. This renders the MSMEs less competitive in a challenging market situations.


iii) Inadequate Access and Marketing Linkages

Weak marketing linkages characterised by inadequate Government support and patronage, lack of adequate marketing infrastructure/ network facilities continue to be a greater challenge for marketing and sale of MSME products.


iv) Lack of Skilled Human Resources

Unavailability of the skilled workforce and descent managerial/entrepreneurial expertise at affordable cost in the proximity of the enterprises is another such big challenge for the MSMEs in our country.


v) Lack of Access to New Technology

Continuance of low technology base in the MSME sector results in low productivity by making these enterprises uncompetitive in the ever-widening industry with most of the industries today requiring application of advanced technology in their operations.


vi) Dilatory and Cumbersome Regulatory Practices

The MSME sector suffers from the cumbersome and dilatory regulatory practices relating to sanction and disbursement of loans from banks, collateral securities/guarantees, for construction permits, resolving insolvency and taxation, etc. Absence of a common regulatory body and inadequate provisions for start-ups affect the growth of such enterprises. Non-adherence to RBI guidelines regarding revival/rehabilitation of seek enterprises by the Banks is another such constraint that needs to be addressed.


This calls for the need for strategic intervention to improve coordination and linkages between various stakeholders including the Government, industries and other agencies/associations working in this field.


Impact of Demonetisation and GST on the MSME Sector

Micro, small and medium enterprises (MSMEs) in India and abroad have demonstrated considerable strength and resilience in maintaining a consistent rate of growth and employment generation during the global recession and economics lowdown. However, at times, the sector faces operational problems due to its size and nature of business, and is, therefore, relatively more vulnerable in the face of shocks to the economy. MSMEs largely operate in the informal sector and comprise many micro enterprises and daily wage earners. As a result, the sector could not escape the consequences of two major shocks, viz., demonetisation and introduction of goods and services tax (GST). For instance, as per on RBI report (2017), contractual labour in both the wearing apparel and gems and jewellery sectors reportedly suffered as payments from employers became constrained after demonetisation. Similarly, the introduction of GST led to increase in compliance costs and other operating costs for MSMEs as most of them were brought into the tax net.


The structural reforms might have disrupted the performance of MSMEs in the short run. Nevertheless, Demonetisation and GST are expected to be positive in the long run with growth in digitisation, enhanced ease of doing business and creation of database of transactions which would facilitate better access to finance and improve the medium- and long-term growth prospects of the sector.

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